Ally Financial Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed February 27, 2017. This is an annual filing, not a standalone fourth-quarter filing, though selected Q4 results are noted below.
Business context
Ally is a digital financial services company focused primarily on automotive finance and insurance, with online banking, mortgage finance, corporate lending, and—following its June 2016 acquisition of TradeKing—brokerage and wealth management. Total assets were $163.7 billion; Ally Bank held $123.5 billion of assets and $78.9 billion of deposits.
Financial results and key metrics
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Total net revenue | $5.44 billion | $4.86 billion |
| Net financing revenue and other interest income | $3.91 billion | $3.72 billion |
| Provision for loan losses | $917 million | $707 million |
| Income from continuing operations | $1.11 billion | $897 million |
| Net income, including discontinued operations | $1.07 billion | $1.29 billion |
| Diluted EPS from continuing operations | $2.24 | $(3.47) |
| Net interest spread / yield on interest-earning assets | 2.49% / 2.63% | 2.44% / 2.57% |
| Operating cash flow | $4.57 billion | $5.11 billion |
| Total assets / total equity at year-end | $163.7 billion / $13.3 billion | $158.6 billion / $13.4 billion |
Continuing-operations net income rose 24%, while total net income declined because 2015 included income from discontinued operations, chiefly the sale of Ally’s China auto-finance joint-venture interest. 2016 income also benefited from lower debt-extinguishment losses and a tax-reserve release; higher credit provisions and weather-related insurance losses partly offset those benefits.
At December 31, 2016, deposits were $79.0 billion, short-term borrowings $12.7 billion, and long-term debt $54.1 billion. The funding table reports $66.5 billion of total debt, excluding fair-value adjustments. Available liquidity was $18.8 billion. Ally’s Basel III CET1, total capital, and Tier 1 leverage ratios were 9.37%, 12.57%, and 9.54%, respectively; Ally Bank’s Tier 1 leverage ratio was 15.21% against a stated 15% commitment.
Fourth quarter: Net revenue was $1.37 billion and continuing-operations net income was $246 million, compared with $1.34 billion and $276 million, respectively, in Q4 2015. Q4 provision for loan losses was $267 million versus $240 million.
Material changes versus the prior comparable period
- Revenue grew 12% and continuing-operations earnings increased, supported by higher consumer and commercial financing revenue, loan-portfolio growth, and reduced debt-extinguishment losses.
- Loan-loss provision rose 30% to $917 million; net charge-offs increased to $801 million from $609 million. Consumer automotive net charge-offs rose to 1.2% from 1.0%.
- Deposits increased $12.5 billion to $79.0 billion, while deposits’ share of liability-based funding reached 54%. Long-term debt declined to $54.1 billion from $66.2 billion.
- Operating lease assets fell to $11.5 billion from $16.3 billion. Lease remarketing gains declined to $213 million from $351 million, and average gain per terminated vehicle fell to $691 from $1,329.
- Automotive consumer originations declined to $36.0 billion from $41.0 billion as Ally emphasized risk-adjusted returns over volume. The portfolio shifted toward used, longer-term, higher-LTV and broader-credit-spectrum loans.
- Ally acquired TradeKing for $298 million and Blue Yield assets for $28 million; integration costs increased operating expenses. Ally also redeemed its remaining Series A preferred stock for $712 million and repurchased $326 million of common stock in 2016.
Outlook, commentary, risks and unusual items
- Management said used-vehicle values faced downward pressure in 2016 and expected pressure to continue in 2017, potentially affecting auto-loan recoveries and lease residuals. Lower lease termination volumes were expected as the GM lease portfolio ran off.
- Management’s strategy is to grow Ally Bank and retail deposits, diversify beyond auto finance, and reduce reliance on market-based funding. It expected to submit its 2017 capital plan by April 5, 2017. The filing does not provide a clear earnings or revenue forecast.
- Liquidity was reported as sufficient for more than 36 months under a stated long-term capital-markets stress assumption, without new unsecured debt or term securitizations. Ally’s estimated Modified Liquidity Coverage Ratio exceeded 100%; the applicable LCR requirement was to reach 100% in 2017.
- Key risks include worsening consumer auto credit, used-vehicle price declines, dependence on GM and Chrysler relationships, competition for deposits, funding and debt maturities, interest-rate sensitivity, regulatory limits on capital distributions, and cyber/technology risks. GM and Chrysler-related business remained substantial; brokered deposits were $12.2 billion, or 15% of Ally Bank deposits.
- Unusual items include a 2016 U.S. tax-reserve release that reduced unrecognized tax benefits, partly offset by a valuation allowance on capital-loss carryforwards. The company reported a $52 million DOJ payment in 2016 to resolve legacy ResCap mortgage investigations. Two securities class actions alleged IPO-related disclosure failures; Ally said it would defend them and could not estimate reasonably possible losses beyond established reserves.
- Ally and Ally Bank received a non-objection to the 2016 capital plan; 2016 included $0.16 per share in common dividends. Future dividends and repurchases remain subject to board decisions, regulatory requirements, and capital conditions.
Important facts for investors to verify
- Whether rising auto delinquencies, charge-offs, and reserve needs remain consistent with pricing and underwriting expectations, especially in newer loan vintages and lower credit tiers.
- Actual used-vehicle prices, lease residual performance, and the trajectory of remarketing gains versus management’s expectations.
- Deposit growth, brokered-deposit dependence, liquidity availability, and the ability to refinance upcoming debt and certificate-of-deposit maturities.
- Capital ratios and Ally Bank’s 15% Tier 1 leverage commitment, including any regulatory normalization or restrictions on capital returns.
- Costs and benefits from integrating TradeKing, progress in diversifying revenue, and the extent of continuing GM and Chrysler concentration.
- Developments in the securities litigation, the automotive-finance consent orders, and the implementation impact of the expected credit-loss accounting standard.